Self-Employment Contributions Act (SECA)

Self-Employment Contributions Act (SECA) Definition§

The Self-Employment Contributions Act (SECA) is a federal law in the United States that mandates self-employed individuals to pay a tax on their net earnings to fund Social Security and Medicare programs. The tax rates under SECA are parallel to the combination of the employee and employer portions of the Federal Insurance Contributions Act (FICA) taxes, ensuring equitable contribution towards these social welfare programs.

Examples§

1. Freelance Writer: A writer operating as a freelance contractor earns $50,000 in a year. Under SECA, they are required to pay a self-employment tax on their earnings to contribute towards Social Security and Medicare.
2. Small Business Owner: An individual who runs a local bakery as a sole proprietorship must pay the self-employment tax on their net business income.
3. Independent Consultant: A consultant providing professional services independently will calculate and pay the SECA tax on their consultancy fees.

Frequently Asked Questions§

1. What is the current self-employment tax rate under SECA?

   • The current self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.

2. Are there income limits for SECA taxes?

   • Yes, the Social Security portion (12.4%) of the SECA tax is capped at an annual income limit, which is subject to change each year. The Medicare portion (2.9%), however, applies to all net earnings, with an additional 0.9% Medicare tax applied to income above certain thresholds.

3. Can self-employed individuals deduct a portion of the SECA tax?

   • Yes, self-employed individuals can deduct the employer-equivalent portion of the SECA tax (half of the total tax) when calculating their adjusted gross income.

4. Do self-employed individuals need to make quarterly estimated tax payments?

   • Yes, to avoid penalties, self-employed individuals often need to make quarterly estimated tax payments, including the self-employment tax.

Related Terms§

• Federal Insurance Contributions Act (FICA): A federal payroll tax imposed on both employees and employers to fund Social Security and Medicare.
• Medicare: A federal health insurance program primarily for individuals who are 65 or older, and for certain younger people with disabilities.
• Social Security: A federal program providing retirement, disability, and survivor benefits to eligible individuals and families.

Online References§

1. IRS Self-Employment Tax
2. Social Security Administration
3. Medicare
4. U.S. Small Business Administration – Taxes for the Self-Employed

Suggested Books for Further Studies§

1. Tax Savvy for Small Business by Frederick W. Daily
2. Self-Employed Tax Solutions by June Walker
3. Small Business Taxes Made Easy by Eva Rosenberg
4. J.K. Lasser’s Small Business Taxes 2023 by Barbara Weltman

Fundamentals of Self-Employment Contributions Act: Taxation Basics Quiz§

Thank you for exploring the intricacies of the Self-Employment Contributions Act and testing your knowledge with our specialized quiz. Your understanding of tax laws will enhance your financial and business acumen!